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The Shale Revolution 13 December 2012 Securities Research & Analytics http://www.credit-suisse.com/researchandanalytics The Shale Revolution Connections Series The Credit Suisse Connections Series leverages our exceptional breadth of macro and micro research to deliver incisive cross- asset and cross-border thematic insights for our clients. SECURITIES RESEARCH & ANALYTICS Please refer to each section of this report for the specific contributors to that section Source: Credit Suisse The early impact of the shale revolution may now be well understood. With the evolution of hydraulic fracturing, extracting unconventional gas first became economical in the late 1990s, with the US leading the innovation. Less understood are the global implications of the unconventional shale boom. Several countries, China the most notable, hold significant shale potential, but most are still years away from the time, technology and policy needed to unlock shale's potential. We explore the countries and regions that could reap shale’s returns in coming years. Considerable reverberations exist throughout the supply chain. From the infrastructure build needed to foster the movement to chemical companies for which natural gas is a key input, the implications of the shale revolution are great and deeply explored in this report. This report leverages the expertise of over 40 research strategists and analysts and paints a clear geographic and sector picture of the shale phenomenon, uncovering significant investment opportunities globally. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit http://researchdisclosures.csfb.com/ccd/disclosures/jsp/index.jsp or call +1 (877) 291-2683 for Credit Suisse Equity Research disclosures and visit https://firesearchdisclosure.credit- suisse.com or call +1 (212) 538-7625 for Credit Suisse Fixed Income Research disclosures. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 13 December 2012 Introduction The Shale Revolution The global unconventional shale boom is arguably one of the biggest technology breakthroughs in decades. What started in a field in Texas has turned into a worldwide phenomenon, with ramifications spreading across a wide range of countries, commodities and industries. The high cost of energy is once again stimulating the search for new energy supplies, alternative fuels and efficiency gains, with technology as always at the foreground of new developments. Although the full impact of this “game-changing” revolution is yet to fully play out, it is clear that significant effects are already under way. In this report, we explore the highly interrelated nature of the global energy system and, leveraging the work of more than forty analysts, the increasing impact of this revolution. We draw conclusions about the likely spillovers from the shale revolution to other energy markets, countries and energy-intensive industries. There are fundamental messages for relative price shifts in commodities, relative competitiveness regionally, relative industry cost curves and potential technological innovation. We also consider the impact of the required capital spending on infrastructure. Of course, politics as well as economics come into play – particularly given the perceived links to energy security or independence, though we question some of the accepted wisdom on the latter where the US is concerned, namely that of the US becoming the “new Middle East of oil” or at least “not dependent anymore on the Middle East for its energy needs.” We believe that there are many geopolitical reasons why the US will remain closely engaged with the Middle East, not least because many of its trading partners remain dependent on energy from the region. The potential for shale gas beyond North America is a key question. Indeed, resources exist in Europe, Latin America, Asia and Australasia, though various constraints suggest that the most optimistic production targets may not be fulfilled. We particularly focus on the role and strategy of China, possessing twice the recoverable resources of the US and facing energy security as a crucial concern. What of the price of the more conventional sources of energy? The impact on coal markets already has been significant as power generation has shifted from coal to gas. Although this trend may abate in the near term, the structural direction is likely to remain downward – eventually dethroning “King Coal.” As for oil, the high prices seen for most of the past five years probably have to continue for a while to attract the investment needed to bring on supply. But, ultimately, looking to the latter part of this decade and beyond, we believe that high prices will be the primary cure for high prices. The shale revolution seems set to play a crucial role in that process, providing a major new energy source to facilitate global economic development. Stefano Natella, co-head of Global Securities Research Eric Miller, co-head of Global Securities Research The Shale Revolution 2 13 December 2012 Table of Contents Introduction 2 Credit Suisse Securities Research & Analytics 4 Focus Charts 5 Executive Summary 6 The US Shale Gas Revolution 11 Unconventional Gas Supply in the US 12 Economic Impact 25 Global Impact: China Shale = Security of Supply 32 Impact Across Commodities 44 Oil’s Shale Shake-Up 45 Coal – The Biggest Loser? 50 Equity Research 61 Sector Implications and Stock Recommendations 62 North America Energy 63 Infrastructure 69 Utilities 81 Clean Technologies 88 Steel and Mining 94 Materials 104 Capital Goods and Engineering 112 Stocks Exposed to the Shale Theme 119 Impact on Global Gas Markets 122 Carbon 146 Appendices 152 Models and Forecasts 153 Impact on Broader Energy Use? 156 Impact on Future Energy Use? 163 The Shale Revolution 3 The ShaleRevolution Credit Suisse Securities Research & Analytics Global Credit Suisse analysts contributing to this report Commodities Research Telephone Email Thematic Research Telephone Email Ric Deverell +44 20 7883 2523 [email protected] Mary Curtis +27 11 012 80 68 [email protected] Marcus Garvey +44 20 7883 4787 [email protected] Kiranjot Grewal +44 20 7883 9247 [email protected] Stefan Revielle +1 212 538 6802 [email protected] Richard Kersley +44 20 7888 0313 [email protected] Andrew Shaw +65 6212 4244 [email protected] Mujtaba Rana +44 20 7883 3773 [email protected] Jan Stuart +1 212 325 1013 [email protected] Economic Research Telephone Email Global Product Marketing Telephone Email Jay Feldman +1 212 325 7634 [email protected] Katie Iorio +1 212 538 6386 [email protected] Neal Soss +1 212 325 3335 [email protected] Arbin Sherchan +1 212 325 8967 [email protected] Equity Research Europe Alex Brooks +44 20 7883 0102 [email protected] Australia Chris Counihan +44 20 7883 7618 [email protected] Paul McTaggart +61 2 8205 4698 [email protected] Arndt Ellinghorst +44 20 7888 0295 [email protected] James Redfern +61 2 8205 4779 [email protected] Charlotte Elliot +44 20 7888 9484 [email protected] Vincent Gilles +44 20 7888 1926 [email protected] Brazil Lars Kjellberg +46 8 545 07 926 [email protected] Emerson Leite +55 11 3841 6290 [email protected] Andre Kukhnin +44 20 7888 0350 [email protected] Andre Sobreira +55 11 3701 6299 [email protected] Michael Shillaker +44 20 7888 1344 [email protected] Canada USA Brian Dutton +1 416 352 4596 [email protected] Kevin Cole +1 212 538 8422 [email protected] Jason Frew +1 403 476 6022 [email protected] John Edwards +1 713 890 1594 [email protected] Andrew Kuske +1 416 352 4561 [email protected] Dan Eggers +1 212 538 8430 [email protected] David Phung +1 403 476 6023 [email protected] Richard Garchitorena +1 212 325 5809 [email protected] Paul Tan +1 416 352 4593 [email protected] Arun Jayaram +1 212 538 8428 [email protected] Patrick Jobin +1 212 325 0843 [email protected] China Mark Lear +1 212 538 0239 [email protected] Horace Tse +852 2101 7379 [email protected] John McNulty +1 212 325 4385 [email protected] Julian Mitchell +1 212 325 6668 [email protected] Singapore Edward Westlake +1 212 325 6751 [email protected] David Hewitt +65 6212 3064 [email protected] James Wicklund +1 214 979 4111 [email protected] Source: Credit Suisse 13 December 2012 4 13 December 2012 Focus Charts Exhibit 1: Shale production growth in the US has been nothing short of extraordinary Exhibit 2: Gas expectations are high in the US… Bcm/y EIA projections for unconventional gas supply, Tcf 250 200 <2 Years for next 104 Bcm/y 150 100 2 Years to Next 52 Bcm/y 50 18 Years to 52 Bcm/y 0 Jan-80 Jan-84
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